EPCA '12: Europe polyolefins volatility leads to nervous market

07 October 2012 09:30[Source: ICIS news]

By Linda Naylor

LONDON (ICIS)--Volatility in the European polymers market is likely to be a hot topic for market players gathering in ?xml:namespace>Budapest this weekend for the 46th annual European Petrochemical Association (EPCA) meeting.

And the mood may well be sombre as difficult markets are further challenged by floundering European economies.

Volatility in polyethylene (PE) and polypropylene (PP) markets has never been so extreme and uncertainty is running high, sources said.

August and September combined prices rose by around €300/tonne ($390/tonne), following a drop amounting to above €300/tonne between May and July. Such extreme price movements were down mainly to volatility in the upstream naphtha market.

For October, the mood is nervous. Demand has tailed off and converters are convinced that prices will fall, either in October, or at the latest November.

Producers argue that there is no point offering lower prices as this will not lead to more volume, and will eat into their margins, which they complain are unworkably low.

"The mood in the market is not bright," said a major PE producer, "but we won’t see a collapse in prices like the one we had in April. The inventory position is very different now and there is no margin for us to lose."

Demand in October has softened, however, now that buyers get the scent of lower prices, and many sources expect producers will have to cut back output to accommodate a drop in volumes.

"We are in a mood to control stock and balance the market," said another producer. "Customers are not keen to build stock, nor are we. Working capital is a problem for everybody at this price level."

Many large PE and PP buyers are torn between pushing prices down in October, and accepting a relatively stable pricing position, as they need to recover increases taken on board in August and September from their own downstream markets. A swift drop in October raw material prices would make this very difficult for them.

For the moment, though, while there are lower spot prices in both PE and PP markets, erosion is mild and there is no sign of a deluge of imported product on its way into Europe, in spite of the price gap between Asia and Europe.

Many traders have not taken the risk to buy product for arrival later in the fourth quarter, when expectations for price erosion is widespread.

"This really is a month [October] of confusion,” said another PE producer. “We could offer lower prices but that won’t mean getting more volume at the moment. We will have to watch naphtha closely. We’ve seen a drop this week, but we saw what happened in June, so just to look at naphtha movements over a couple of days is not enough."

One trader summed up the situation: "Everybody thinks prices will be lower but to find a significant price reduction in October so far is impossible."